WASHINGTON — A Pentagon watchdog agency is withdrawing a clean audit report it gave the US Marine Corps in 2013, an embarrassing snag for the Defense Department's endeavor to become auditable, and one which drew head-shaking in Congress.
The DoD Inspector General (IG) pulled the audit March 23 after learning of Marine Corps transactions in US Treasury "suspense accounts," set up for transactions where some piece of missing information prevents it from being posted properly. While there have been the DoD IG has made no accusations from the DoD IG of wrongdoing, it is monitoring efforts to determine the sources, quantity and value of the mystery transactions.
The episode is significant because it hints at the difficultly for DoD as strives to become audit-ready by 2017, an undertaking the Government Accountability Office (GAO) described as making mixed progress by the Government Accountability Office. The GAO has since 1995 placed DoD on its "high risk list" of poor-performing programs or agencies because it cannot account for an inventory that's 33 percent of the federal government and includes $1.3 trillion in property, plants and equipment.
"By law and by common sense, the Pentagon needs to break the habit of relying on bad accounting," Sen. Chuck Grassley, R-Iowa, said in a statement reacting to the DoD IG decision. "Clean, accurate audits are necessary to hold the Pentagon bureaucracy accountable to the taxpayer."
GAO had been leading an investigation into whether the clean audit opinion for the Marine Corps was justified. According to Grassley, the GAO, the inspector general's audit team and deputy inspector general were saying said for months that the evidence in the Marine Corps submission did not support the clean opinion. Grassley further asked that, said that "those responsible for sanctioning unreliable documents should be held accountable."
Rep. Mike Conaway, an accountant who has been vocal on DoD auditability, said the "bum" transactions must be reconciled for not only the Marine Corps, but each service's audit to be complete.
"These developments are the difficult part of the ugly under-belly of the audit process, and to some degree are expected," said Conaway, R-Texas. "This certainly is not an easy process, but it is critical that we learn from our mistakes because we cannot afford to make them again and expect to make the audit deadline."
DoD has initiated numerous attempts over the years to address its financial management weaknesses and achieve audit readiness, and in 2005, issued its first Financial Improvement and Audit Readiness (FIAR) plan. In 2010, Congress passed a defense authorization act that locked in a Sept. 30, 2017, deadline and required twice-annual updates for Congress on the effort's progress.
Key to undertaking has beenThe fielding of enterprise resource planning systems (ERPs), which are — computers or software that includes accounting, payroll and supply-chain management functions, — is key to the undertaking, though those fieldings have been plagued with delays and wasteful spending, according to the GAO. (The Army is replacing systems that date to the early 1970s, and the Air Force, 1968.)
As the services struggled to submit full statements of budgetary resources, as part of earlier goals, the Pentagon scaled back to a phased approach. In the run-up to the 2017 deadline, it is requiring not the full statements from the services, called SBRs, but less comprehensive, single-year schedules of budgetary activity, called SBAs — which each service has since submitted.
TK defended the Pentagon's step-by-step approach as preparing the services for the 2017 deadline.
"We need to get into the audit game and undergo the rigors of an annual audit," TK said. "There is some muscle memory that the other agencies go through, and the Department of Defense needs to go through that as well."
The Pentagon is "moving the goalposts," by narrowing the deliverables, said Rafael DeGennaro, director of the Audit The Pentagon Coalition, and it has directed attention at its 2017 deadline, he said, when it should be in compliance with a 1990 law requiring federal agencies to be capable of passing annual audits.
DeGennaro noted several bills in Congress that attach penalties for the DoD if it fails to meet the 2017 deadline or pass audits.
"[Taxpayers] are subject to audit, and if you cannot pass an audit there will be consequences," DeGennaro said. "If this is an obligation taxpayers who provide money to the government are required to meet, it is only fair that those who spend the taxpayer money be required to meet the same general obligations."
In late 2013, then-Defense Secretary Chuck Hagel announced that the Marine Corps became the first military service to successfully undergo an audit and that the DoD IG granted it an unqualified, favorable audit opinion for its current-year budget statement.
Less than two years later, DoD IG said it received documentation as part of the Marine Corps' 2014 SBA for the suspense accounts which had not been included in the service's Marine Corps' 2012 submission. The Defense Finance and Accounting Service, which GAO has previously tagged as having weak financial controls, had reported USMC transactions directly to a Treasury suspense account.
The Defense Finance and Accounting Service "DFAS must compile a list of all the transactions in the suspense account and determine which fiscal year and military service each transaction belongs to for the past three fiscal years," DoD IG spokeswoman Bridget Serchak said. "Once we have received this information, we will separately audit the procedures, controls and balances in these suspense accounts."
Suspense accounts, according to defense officials, are meant to handle transactions that for one reason or another lack information that would reveal what appropriations account should fund them. The transactions in a suspense account are meant to be researched so that they can be completed properly.
To DeGennaro, who gave measured praise to the DoD's efforts, this indicated the Pentagon had "overhyped" the Marine Corps' clean audit.
"What is wrong is the Pentagon brass overhyped the Marine Corps' limited successes and now look like they're more concerned with public relations than reality," DeGennaro said.
But defense officials say they are making progress, sorting through what one called a "complex web of accounting systems" that in some cases overlap between the services, and spurring new, higher record-keeping standards for their workforces.
"What the department is undergoing is extremely challenging, it's not easy," the official said. "We know that when we go to audit, there will be audit findings and our intent is to aggressively try to work out that list and make sure we're correcting them as fast as we can."
The Navy reports that its audit readiness preparations are in the initial planning stage, in which the auditors get a better understanding of the service's worldwide business operations. The service's audit team anticipates it will conduct financial transaction testing during the summer and then evaluate its compliance with audit standards, a Navy spokesman said.
The Army has been going through a series of mock audits as it proceeds, and recently passed an audit of its real property, said Robert Speer, the assistant secretary of the Army for financial management. It is variously enforcing or educating its workforce about record-keeping standards, — for example, Speer's office has helped the three-star general overseeing the Army's operations in Iraq to improve its the operation's bookkeeping.
Speer said the Army has worked to integrate various personnel pay systems, some with duplicate records that did not agree, after a critical inspector general's IG report three years ago.
"We think that we have a good handle on it for a schedule of budgetary activity for 2015," Speer said. "So that is part of the value of going through this current audit."
Looking at the 2017 deadline, the Air Force, too, is planning mock audits of its financial statements. In the initial stages of its SBA audit, it has so far received clean opinions of its military equipment, cruise missiles, aerial targets, drones and uninstalled missile motors.
The biggest challenges, said Stephen Herrera, associate deputy assistant secretary for financial operations of the Air Force, are driving permanent change into day-to-day operations and upgrading its information technologies, all while defense budgets shrink.
"We will be 100 percent ready to undergo an audit," Herrera said. "That should not imply that we will have corrected every potential finding that may occur in an audit. Our strategy is to address high risk, material areas sufficient to demonstrate Air Force auditability."
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Joe Gould is the senior Pentagon reporter for Defense News, covering the intersection of national security policy, politics and the defense industry. He served previously as Congress reporter.